Legal Criteria For Rating securitisation instruments & Covered Bonds

Introduction to the legal criteria for rating
securitisation / mortgage bonds
Romanian law perspective

Moody's 2nd Annual CEE Credit Risk Conference
12 June 2008, Bucharest

Andrei Burz Pinzaru
Senior Manager

Reff&Associates is the correspondent law firm of Deloitte Romania

Legal criteria for rating securitisation / mortgage bonds
Introduction

Legal Issues are analysed in rating any securitisation / mortgage bonds
transaction, but are particularly significant in new markets

Reasons

- the local laws and the nature of the legal system are less well known

- legal precedents may be limited or less applicable to securitisations / mortgage
bonds


Romanian legal framework for securitisation and mortgage bonds

Amendments to the Mortgage Lending Act (Law No. 34/2006, published
on 3 March 2006, amending Law 190/1999)

The main legal
The Securitisation Law (Law 31/2006, published on 13 March 2006) framework for
securitisation
and mortgage
bonds in
The Mortgage Bonds Law (Law 32/2006, published on 23 March 2006) Romania

•CNVM/NBR Regulation 12/2006 on the authorisation of agents
•NBR Norm19/2006 on eligible assets for “refreshing” MB cover pools
•CNVM Regulation11/2006 on securitisation
•CNVM&NBR Regulation 21/2006 on the credit risk in securitisation


Romanian securitisation framework: key features
A financial operation whereby an investment vehicle purchases pecuniary claims (all
Definition of
accessory rights included), (“assets”), groups them in pools and issues securities backed
securitisation under
by the respective assets’ corresponding cash-flows (“asset-backed securities”, in
Romanian law
Romanian “instrumente financiare securitizate”).

Pay through and pass-through structures available:
SPV set up as securitisation company
SPV set up as civil partnership (no legal personality)

Key legal aspects
SPV’s unchallenged ownership of asset pool – no insolvency claw-back
SPV’s bankruptcy remoteness: limited purpose, operational and management independency,
SPV insolvency protection for investors regarding the asset
Investors’ interest in the collateral (limited statute of limitation of challenge of collateral)

Key regulatory aspects
Entities involved in securitisation need authorisation by Securities Commission and Central Bank
Agent (trustee)
SPV administrator (corporate servicer) – minimum EUR125,000 equity
Portfolio management company (payment agent)


Romanian mortgage bonds framework: key features

Securities issued by banks, under CNVM’s supervision, based on a offering circular
Definition of
approved by CNVM, for the purpose of refinancing the mortgage lending activity of the
mortgage bonds
issuer, based on a cover pool of mortgage loans over which the investors are granted a
under Romanian law
first rank security interest and a preference right against any other creditors of the issuer.

Mortgage bonds: financial instruments accessible only to banks

Key legal aspects
Detailed regulation of Assets eligible for the cover pool and refreshment of the cover pool
(replacement of assets)
Protection of the investors’ interest in the cover pool
Isolation of the cover pool. Bankruptcy remoteness

Key regulatory aspects
Entities involved in securitisation need authorisation by Securities Commission and Central Bank
Agent (trustee) – mandatory for mortgage bonds (as opposed to securitisation)
Portfolio management company (payment agent)


Preliminary legal considerations in rating securitisation /
mortgage bonds
Does the necessary infrastructure exist to accommodate regulatory
concerns?

- It is important to ascertain whether or not the necessary infrastructure exists, to
accommodate structural, accounting, and other regulatory concerns.

- The extent to which relevant originators (e.g., banks, consumer lenders) are regulated
influences normally the credit quality of their products as well as their motivation to
securitise / issue mortgage bonds.

- Data/consumer protection rights

- Foreclosure

- Regulations of the rated instruments

- The nature of the accounting and tax treatment of the transaction.


Preliminary legal considerations in rating securitisation

- The structure of the special purpose vehicle (SPV) that issues the
securities

- Type of asset backed securities (debt or equity)

- Impact of local laws on issues such as bankruptcy, transfer of assets to
SPV or foreclosure?

- Could the ‘true sale’ of the assets to the SPV be challenged in the
event of the originator’s insolvency (‘claw back’)?

- The noteholders’ security interest in the assets, data/consumer
protection rights, foreclosure, etc.


Preliminary considerations in rating mortgage bonds

- Is there a special legal framework for mortgage bonds?

- How is protected the bondholders’ security interest in the cover pool?

- Impact of bankruptcy of the originator on the cover pool and mortgage bonds
investors


Legal Issues Frequently Encountered in New Markets:
Borrower/Loan Related

- Enforceability of loan documents, including the underlying security

- Average time to enforce security and average recovery costs

- Enforceability of prepayment penalties

- Consumer protection laws –limitations on the data that banks/lenders can
share with investors / other third parties?


Transfer of receivables
- Is a notification to borrowers needed? If so, what are the implications if no notice is
given?

- Are there any other requirements in order to perfect the transfer of the receivables?

- Is there any registration required in connection with certain assets (e.g., mortgage
loans)?

- Is there a stamp tax or transfer tax?

- True sale – What is the possibility that a court would re-characterise the transfer as a
secured loan in case of the seller’s bankruptcy? Is there relevant case law?

- Claw back – How far back in time can a court go to cancel the transfer, in the case of a
fraudulent conveyance or a preference?


SPV

- Is there a specific law for its structure and conditions?

- Is there a minimum capital required? Restricted actions? Minimum number of
officers? etc.

- Is the SPV and/or its assets legally segregated from its affiliates and/or
creditors?

- Is it eligible to file for, or be placed in, bankruptcy? If so, how will the underlying
assets be treated in its bankruptcy?


Bankruptcy

- Specifics of the bankruptcy law

- The typical time frame of the proceedings

- How are secured creditors treated differently from unsecured creditors?

- Typical priority order of claims

- Who has the capacity to decide on the plan of liquidation / re-organisation?


Taxation

- Taxation on the revenues of the SPV

- Stamp or transfer tax - with respect to the transfer of receivables

- Value added tax (VAT)

- Withholding tax – applied to the payments made by the SPV to investors

- Other taxes under securities laws


Concluding comments

How well does Romanian legal framework “serve” the rating of securitisation /
mortgage bonds?

Local versus cross – border transactions


Securitisation Services : Financial Advisory
in Romania Legal assistance
Tax assistance

Contacts
Tax Services Legal and regulatory
Rodica Segarceanu Andrei Burz Pinzaru
Partner Senior Manager

Direct:+40 21 207 53 64 Direct:+40 21 207 52 05
Fax: +40 21 319 51 03 Fax: +40 21 319 51 02
Mobile:+40 744 328 381 Mobile:+40 728 328 928
Email: rsegarceanu@deloittece.com Email: aburzpinzaru@deloittece.com
www.deloitte.com/ro/legal
4-8 Nicolae Titulescu Road,
East Entrance, 3rd floor, 4-8 Nicolae Titulescu Road,
Sector 1, Bucharest, 011141 East Entrance, 3rd floor,
Romania Sector 1, Bucharest, 011141
Romania


Legal Criteria For Rating securitisation instruments & Covered Bonds

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